EDITORIAL (MARCH 2017): Foreign buyers tax a necessary cliff jump

Pursued to the edge of a cliff by relentless law enforcement, Butch Cassidy and the Sundance Kid were faced with an unenviable choice: jump, be captured, or — the most likely alternative — be killed while being captured. As they contemplate their fate, Butch and Sundance begin to argue over who should jump first, with Sundance finally admitting that he can’t swim.

“Are you crazy, the fall will probably kill you”, responds Butch, laughing, just before they finally jump — together. In this infamous scene from a 1969 Hollywood depiction of true-life events Butch and Sundance avoid drowning and escape the law, floating off to live another day.

This growth not only makes buying a house unaffordable for a huge swath of the population, it is also unsustainable and sucks real money out of the economy; money that could make a meaningful contribution to our gross domestic product.

It’s a classic portrayal of being stuck between a rock and a hard place of having to make a decision when doing nothing is not an option.

According to the Toronto Real Estate Board, Greater Toronto Area (GTA) house prices in February were up 32.5 per cent over one year ago. Analysts have run out of adjectives to describe the extreme nature of this phenomenon. The average price for a detached home in the GTA is over $1.2 million, with the price of an Annex house much higher, as dedicated readers of our Focus on Homes section will know.

This growth not only makes buying a house unaffordable for a huge swath of the population, it is also unsustainable and sucks real money out of the economy; money that could make a meaningful contribution to our gross domestic product.

No one really believes the house they are purchasing is worth the millions in mortgage debt. It’s two or three bedrooms surrounded by plaster and brick on a 14-by-75-foot lot “close to TTC, U of T, schools, and lots of amenities”, as the listings tend to read. Most homes are sold without conditions, no survey, and no home inspection. Sometimes the buyers don’t even view the property. Sometimes they live in far-flung lands and the motive is to purchase a commodity, not to find a home in which to live.

Garth Turner, who was briefly the Minister of National Revenue under Kim Campbell, wrote in his 2005 book Greater Fool: The Troubled Future of Real Estate that such behaviour epitomizes the greater fool theory: when the price of an object is not determined by its intrinsic value, but the belief that another purchaser — the greater fool — will pay more for it down the road. It’s been a viable theory so far that has not only reaped untold millions of profit for speculators, but has also increased the theoretical value of every homeowner’s equity, be they speculators or not.

Faced with an equally out-of-control residential real estate market, British Columbia enacted legislation imposing a 15 per cent tax on purchases of property by foreigners in that province. Acting on incomplete facts, as leaders sometimes must do, B.C. took the legislative plunge, applied the tax and waited, hoping it would cool (not kill) the market. It appears to have had its desired effect: prices have fallen approximately 12 per cent in a year. It seems to have worked, even though we may never know why.

The province, like Ontario, was not tracking at the time who the buyers were, where they lived, and their source of income. It was a shot in the dark at real estate speculation from foreign lands.

Now, it may be that those prospective buyers, rebuffed in the west, have moved their focus to the GTA. But John Tory and Kathleen Wynn appear unwilling to follow B.C.’s lead, saying they say they need more facts to make an informed decision. Perhaps they figure the market will collapse under its own weight, and don’t want to appear to have caused it.

This is a defeatist and cowardly course to chart. They are really worried about curbing speculation and crashing the market, evaporating the $1.5-million in equity that grandma had in her Scarborough bungalow. Neither are likely to be re-elected after such a scenario.

Like Butch and Sundance facing inevitable capture and certain loss, this housing market bubble will burst left to its own devices. The mayor and the premier must summon the courage to enact measures to cool the market, even if it’s a jump fraught with political danger.